Reveal Industry May Have a Shale Gas “Bubble” on its Hands;

Actual Barnett Shale Production Data Challenges

“Fantastic Claims” for New Shale Plays, Like Marcellus

“I have never seen an investment more hyped than shale gas,” says Deborah Rogers, who brings both financial and business experience to her analysis of the shale gas industry.

“After years in the financial markets in Europe and the US, the one thing I learned is that if something is hyped to this extent, beware.”

Rogers’ financial career began in London where she worked in venture capital financing. Returning to the United States, she worked as a broker with Merrill Lynch and Smith Barney. In addition, she has served on the six-member Advisory Committee for the Federal Reserve Bank of Dallas.

In 2003, she started her own company, Deborah’s Farmstead, producing award-winning artisanal cheeses.

She shared her analysis of the economics of shale gas extraction in a presentation given at a summit in Pittsburgh, PA, in November and sponsored by the EARTHWORKS Oil and Gas Accountability Project.

A copy of her Powerpoint presentation is included below under “Links and Resources” (bottom of this post).1 In addition, she has been good enough to share her notes with this blog.

Barnett Shale Actual Results

Her analysis leads her to striking conclusions about the shale gas extraction record of the Barnett Shale in Texas:

Based on historical production data filed with the Texas Railroad Commission (which regulates the oil and natural gas industry), the average Barnett Shale well life is 7.5 years – not 30-40 years as originally projected.

About 70% of predicted production in horizontal wells has been produced by year 5.

In fact, production from Barnett shale horizontal wells actually peaked in 2003. “It is a play in severe decline.”

Oil and gas companies have traditionally been cash cows; but today’s shale operators “have virtually no cash available … [and] are laden with debt.”

In addition to reviewing data filed with the Texas Railroad Commission, Rogers’ research includes poring over financial statements of shale gas companies, corporate 10-K reports filed with the Securities and Exchange Commission, and corporate press releases.

Her analysis of the famous Barnett Shale challenges the credibility of the gas industry’s golden promises for other shale “plays” such as the Marcellus, Haynesville as well as international sites.

Industry’s “Fantastic Claims”

One of her intriguing and tough-minded sources is Arthur Berman, a petroleum geologist and industry consultant, who is also a contributing editor for World Oil magazine.

Berman has written (emphasis added): “I am disturbed that public companies and investment analysts make fantastic claims about the rates and reserves for new shale plays without calibrating them to the only play that has significant production history. Almost every assumption used by the industry to support predictions about the Haynesville or Marcellus Shale plays is questionable based on well performance in the Barnett Shale.”2

As real production history (vs. early projections) for the Barnett Shale accumulated over time, Rogers found significant discrepancies between what shale gas companies said and projected about recoverable reserves, production life of wells and other key indicators, including toxicity issues.

She notes: “Based on data from the Barnett, we now know that the average well life is not 30-40 years as projected, but averages 7.5 years with 70% of the production in horizontal wells typically produced by year five. Very few wells will make it to a 15-20 year lifespan much less 30-40 years.”

Barnett Shale – “Play in Severe Decline”

According to Rogers, “Barnett horizontal wells peaked in 2003, averaging 1.14 Bcf/well [billion-cubic-feet of gas per well]. Since that time production has declined every year to 0.59 Bcf/well in 2008. It is a play in severe decline,” she concludes.

“Oil and gas companies have traditionally been ‘cash cows’ but shale operators have virtually no cash available,” Rogers notes. “There is, relatively speaking, no cash on their balance sheets. And yet they are heavily laden with debt.”

“Wells are drilled to generate cash in order to meet debt service, but due to the steep decline curves of these wells, the older wells deplete at alarming rates, Rogers says. “Thus every new well that is drilled is merely playing ‘catch up’ to keep overall production at current levels,” Rogers says.

“This is best demonstrated by the following statistic,” she says. “In 2008, 3,000 more wells came into production in Barnett for an overall increase of only 1.24 Bcf/day. Analysts thought they would see 8 Bcf/day.”

“Why so little growth,” she asks? “Because older wells were depleting so quickly that the new wells simply could not keep up overall production and add significant growth.”

Texas Rail Road Commission Data

Rogers notes that “Historical production data filed with the Texas Rail Road Commission (RRC) showed no correlation between the initial production in shale wells and ultimately recoverable reserves.”

Ultimate recoverable reserves is a term and a method used by the gas and oil industry, and known formally as Estimated Ultimate Recovery or EUR.

According to Investopedia, “Estimated ultimate recovery (EUR) is an approximation of the quantity of oil or gas that is potentially recoverable or has already been recovered from a reserve or well.”

For example, she says, the gas industry “projected average reserves (EUR) to be 2.5 Bcf/well for Barnett but it turned out to be 0.81 Bcf/well.”

“That means that reserves may be overestimated by a substantial factor, possibly as high as 300%. In even simpler terms, these companies may have borrowed a huge amount of money based on reserves that they cannot pull out of the ground at a commercially viable cost.”

“Some analysts have gone so far as to liken this to the mortgage backed securities bubble.”

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